Gold Reserve, Rusoro Continue War Of Words

Calling Rusoro Mining’s (RML-V, RMLFF-O) unsolicited takeover bid “opportunistic” and “financially inadequate,” Gold Reserve’s (GRZ-T, GRZ-X) board of directors has unanimously recommended that shareholders reject the offer.

Outgoing financial advisers J. P. Morgan Securities and RBC Capital Markets, have both deemed the bid inadequate, Gold Reserve said.

Based on the closing price of Rusoro shares on the TSX Venture Exchange on Dec. 29, the last trading day before the date of the board’s recommendation, the implied offer price was $1.86 per Gold Reserve share, Gold Reserve says.

Gold Reserve formed an independent committee to consider the terms of the offer and its value to shareholders and concluded that the bid does not represent a premium because it doesn’t value the company’s world-class Brisas deposit, a development-stage gold and copper open-pit project in Venezuela’s Bolivar state, or the company’s cash assets.

According to its calculations, Gold Reserve would contribute 84% of the combined company’s proven and probable reserves, 100% of the combined company’s cash and investments, and advanced project engineering, site analysis and drill data.

All it would receive in exchange, it argues in a prepared statement, are Rusoro’s “liquidity and operational problems, substantial reserve impairment and a weak asset base.” Douglas Belanger, Gold Reserve’s president, did not return phone calls requesting comment.

Gold Reserve’s assertions are “a smokescreen that impedes their shareholders from getting a chance to view a decent bid that’s on the table,” says Rusoro’s president George Salamis.

“There are too many allegations — and they’re all way off base — and we’ll provide an official response soon,” Salamis told The Northern Miner.

“All they’re trying to do is provide a distraction from a bid process that was done in an open manner according to the rules and regulations.”

Among Gold Reserve’s long list of criticisms are Rusoro’s “weak” financial position and its “lacklustre” operating performance, both of which it says “present significant risks” to its shareholders.

Gold Reserve points to Rusoro’s “negative cash flow, working capital deficit and near-term debt repayment obligations.” For the nine months ended Sept. 30, Rusoro incurred a loss before income taxes of about $74.1 million, Gold Reserve notes, and Rusoro has long-term debt of $80 million, which is due in full on June 10, 2010. A syndicate led by Peter Hambro Mining advanced the secured exchangeable loan in June.

When Rusoro’s $80-million debt is aggregated with Gold Reserve’s own obligations under its 5.5% senior subordinated convertible notes, the total equates to an annual interest obligation of about $14 million, Gold Reserve maintains.

In addition, Rusoro’s claim that Gold Reserve shareholders would own roughly 30.4% of the combined company is “misleading,” Gold Reserve’s board argues. “If Rusoro’s options and warrants are exercised and the Hambro/Endeavour loan converts into shares in the future, Gold Reserve shareholders would only own about 22% of the combined company,” the board argued in a release.

Furthermore, Rusoro has a history of growth through acquisitions financed by issuing additional shares and Gold Reserve estimates that Rusoro would need to issue a significant amount of additional equity in the combined company, which would further dilute the collective ownership of Gold Reserve shareholders.

Gold Reserve also points to Rusoro’s “poor operational results” at its Choco 10 mine, where the cost of production surpasses the price at which it sells its gold.

Finally, Gold Reserve argues that the bid was timed to deprive Gold Reserve shareholders of the benefits of the expected near-term announcement and implementation of mining sector reform in Venezuela, and that there is no reason to believe that its shareholders stand to gain from Rusoro’s claim that it has an “established” relationship with the Venezuelan government.

As proof, it cites a Venezuelan government entity, Ferrominera del Orinoco, that has started legal proceedings against a Rusoro subsidiary, Promotora Minera de Guayana (PMG), demanding an annulment of a shareholders’ meeting in which its equity stake in PMG was watered down to 0.02% from 30%.

In addition, Rusoro has not received all of the permits that are required for its Choco 10 mine, while Cooperativa de Molineros El Callao II RL has begun a court action against Rusoro claiming possession of Choco 10 and US$10.5 million in damages for its eviction from the mine site, Gold Reserve states.

“Our plan is to continue to work with the Venezuelan government to finalize the necessary preproduction permits for the Brisas project,” said Gold Reserve’s Belanger in a statement. “We expect to meet with the Venezuelan government in January 2009 to address anticipated mining sector reforms and the potential impact on our Brisas project.”

In a press release issued on Jan. 5, Rusoro rejected Gold Reserve’s claims and argued it had completed a positive quarter of operations at both its Choco 10 and Isidora mines, which the company acquired in November 2007 and July 2008, respectively.

The Vancouver-based, Russiancontrolled company also reiterated that the bid represented a value of $1.08 per Gold Reserve share, a premium of 140% on the closing prices and 209% on the 30-day volume-weighted average prices, using Rusoro and Gold Reserve’s share prices for the relevant trading days on the TSX Venture Exchange and the Toronto Stock Exchange, respectively. (Based on Rusoro’s closing price on the TSX Venture Exchange on Jan. 2, the bid represented a value of $2.04 per gold Reserve share, it maintained.)

Rusoro asserts that Gold Reserve had hired a litigation accounting firm to attack its financial statements but said it was confident that it had provided all required financial disclosure in its public filings. It also claimed Gold Reserve had hired a technical consulting firm to attack its technical disclosure, but noted that the consulting firm’s conclusion was that Rusoro may have overstated its contained gold ounces by about 114,000 oz. due to the amount of mining Rusoro had completed since the last reserve estimate. “This amount is approximately 1.6 per cent of Rusoro’s measured and indicated resources (inclusive of reserves) of 7.1 million ounces of gold and Rusoro does not believe this change is material,” the company’s management noted.

It called Gold Reserve’s allegations that Gold Reserve shareholders would only own about 22% of the combined company (as opposed to 30.4%) untrue, and that legal proceedings against Promotora Minera de Venezuela (PMV) were initiated before the company was part of the Rusoro group. It also noted that the legal action was abandoned in July 2008 and that PMV’s 95% ownership in the Choco 10 operations “is no longer under dispute.”

In addition, Rusoro argued that it had never trespassed on Gold Reserve’s Choco 5 property, but had completed limited condemnation drilling there in accordance with established practices between the two companies.

Rusoro also denied Gold Reserve’s charge that it lacked operating experience, pointing to record amounts of ore processed through its Choco 10 mill in November 2008, and record low combined cash costs at the Choco 10 and Isidora mines of US$385 per oz. in November.

Finally, Rusoro denied Gold Reserve’s claims that it does not have a constructive working relationship with the Venezuelan authorities, arguing that not only had it restarted Choco 10 and Isidora, both of which had been shut down by previous owners due to labour and permitting issues, but had also permitted and developed San Rafael/El Placer project operations, which are expected to reach commercial production in 2010.

At presstime, Gold Reserve was trading at $1.25 per share and Rusoro at 70¢ per share.